Breakeven Modeling for a Multimodality Imaging Center

In the 1980s and 1990s, payor fees were generous for the newest modalities, and most freestanding imaging facilities were quite profitable. There was little need for advanced cost accounting. Imaging centers and facilities within physician’s offices proliferated, however. Payors became far more aggressive in discounting what they would pay. When competition and pricing reach this level, only practices with a good understanding of their breakeven points will make prudent decisions on both payor contract negotiations and the nature of operations. Some license has been taken with costs and revenues in the models described here; they cannot be used as benchmarks.
Basic Financial Reporting Structures
There are two basic ways to represent financial results: accrual or cash-basis accounting. Accrual more accurately portrays when a legal entity produces income and incurs expenses and liabilities. In the health care environment, however, it is difficult to determine the true cash value of clinical services at the time they are rendered. The liquidation of a month’s charges can take between six months and two years.
Most radiology practices report operating results on either a cash or a modified cash basis. The cash basis implies that income is only recognized when cash is collected, and expenses are incurred when they are actually paid. The modified cash basis is a hybrid system where expenses are recorded when the liability is incurred; income is only recorded when cash is received.
Breakeven modeling requires alignment of income and expenses. Cash-basis reporting can skew these models because streams of income can flow in somewhat random patterns for many months after the month of service; some expense payments are also delayed, perhaps due to cash-flow limitations. The implication is that one should harvest income and expense patterns from actual data and should organize them as if they were reported on an accrual basis.
Basic Breakeven Formulation
The math of breakeven modeling is the simple part; the challenge lies in classifying and tracking the expenses that support the model (see figure). The formula for breakeven volume is:
Fixed costs/(income/exam–variable costs/exam)
Contribution margin is calculated using this formula:
Income/exam–variable costs/exam

Breakeven Modeling

The real world is seldom this simple. Volume growth can trigger increasing operating hours that require higher labor costs, utility expenses, and sometimes, even more rent. These create step-fixed costs (shown in red in the figure) that will shift the breakeven point to the right. Volume discounts could also enable an imaging center to secure better prices for disposables, causing the variable cost line (in green) to appear as more of a downward arc. Unit costs are highest when volume is low, but decline with increased caseloads.
Expense Classifications
Identifying and grouping expenses are critical to the modeling process. Table 1 lists the expense categories for a facility that has MRI and CT scanners running 12 hours per weekday and eight hours on Saturday. The fixed expenses show monthly information.
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The direct expenses are categorized as variable or fixed. Some costs are easily classified. Equipment leases and maintenance will often be specific to each modality. Space rent requires the accounting staff to distribute the cost by square footage, distinguishing that devoted to imaging/control/equipment rooms from that for patient and staff support. Technologists sometimes cover more than one modality and must be required to provide time sheets based upon their caseload distribution. PACS costs could be variable (Internet-based system charged for by exam volume) or fixed (on-site hardware/software), and would be allocated using some volume formula—perhaps memory requirements per exam.
Utilities fall into all three categories. There is no published information on the variable cost of utilities per scan. When a facility is closed, metered utility use will be at its lowest; this is the fixed component. An open facility with no scheduled scans will have slightly higher metered use. The scheduled cases for the day will trigger the variable component. Modeling the allocation requires working with the utility company, the equipment manufacturer, and the building owner. Separately metering the rooms may help, where random tracking of meter values on off days is then measured against days with various caseloads. The variable cost in Table 1 is not supported by such research; it is illustrative.
Billing expenses are variable, and an imaging facility would be wise to subcontract this function to a specialized vendor, rather than performing it in-house, because it does not have sufficient volume to do its own billing cost effectively. This makes the cost easy to predict because vendors charge a percentage of collections. Therefore, the pattern of cost per exam will be:
Income/exam x contract rate=fee per exam
Table 1 is a good approximation of what a facility should effectively pay per exam, based on a negotiated rate.
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Column A shows a range of technical-component fees. Column D uses 50% of general and administrative fixed costs; this is an arbitrary allocation in this illustration. The actual allocation will probably be based on relative volume (MRI versus CT). Columns E and G provide the monthly and daily volume, at each price point, needed to cover direct expenses. Columns F and H show the volumes needed to cover total fixed costs. Footnote 5 shows the facility’s finite capacity during its hours of operation.
The first line, highlighted in blue, shows the lowest fee per scan needed to pass the acid test: coverage of at least the direct costs of performing the scan. The second highlighted line (yellow) shows the lowest fee per scan needed to break even, if every time slot were filled. The last line, highlight in brown, is a hypothetical representation of how the facility would function if all of its income per scan were at the market maximum. In a sense, this is the best-case scenario. Productivity would have to exceed 50% slightly in order to break even:
173/335=52%
A facility operating well below breakeven volume is wise to take any cases where income per exam exceeds variable cost. It must make certain that it can quickly cancel/renegotiate the contract if it begins to secure business at materially higher fees.
A busy center operating above breakeven volume should monitor its income and variable costs per scan closely to head off any trends that could drive operating results downward. Because of the way that imaging centers are paid, it is possible for a negative income trend to occur that does not manifest itself for 90 to 120 days. The advantage of keeping the models current is that it helps quickly identify patterns that can create cash-flow problems beyond the capacity of the center’s lending facilities.
Breakeven Modeling in a Fee-based Environment
Table 2 should be constructed before commitments have been made to acquire imaging equipment and facility space. The breakeven model tells the center the volume needed for financial success. The prospective owners also need to determine probable monthly caseloads, based on their market research about nearby referring physician practices and a likely payor configuration. This research helps determine if there is a sufficient patient base in the target area to meet volume targets.
Exam volume takes time to grow. Facilities are seldom fully booked in the early months of operation and, in fact, may never reach full capacity. Marketing and negotiations with major payors are critical steps, and not just in the beginning. Realistic breakeven models help support the effort, especially in attracting payors who can prove to be allies if they like the service and price. Drawing on the information in Table 2, the worksheet in Table 3 shows how breakeven modeling helps frame marketing goals.
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Five monthly scenarios are illustrated. Column B shows average monthly volume; average cash per scan is column C. Column D is the variable cost, based on $42 per scan, and column E is the sum of fixed direct and general and administrative expenses. Column F is the simulated net income or loss, and column G is the incremental volume required, at the current average fee, to break even (footnote 2 explains the math). Column H shows the maximum scans that can be performed based on the 12-hour/8-hour shift configuration. Column J has been introduced to account for the only other maximum to consider in planning: What is the least number of scans needed to break even if the market maximum could be secured on the exams above current volume? We now have a foundation for strategic planning with the breakeven information.
It is probably not realistic to assume that a facility’s average income per scan can be materially altered without negotiation. The location of the facility often dictates the coverage of the patients referred there. The construction of breakeven models helps frame the necessary steps. First, it helps determine whether the facility can be viable at the current average income. Second, it tells the owners what fees they must negotiate with payors to become viable if current pricing is inadequate.
Column I, with footnote 3, covers these two scenarios. First, if the facility cannot break even at the current average fee, the model provides the incremental pricing that will let it exactly break even if every incremental time slot (column H) is filled. Second, if the current average fee allows a facility to break even at volumes below maximum (column G is less than column H), then column I is the maximum monthly profit at the current average fee. Any improvement in the column-C fee will improve profits.
Scenario 1 is not sustainable, at the current fee, because the required volume is much higher than the remaining time slots allow; higher fees have to be secured for the center to be viable ($428.49 per scan for the remaining 185 time slots). An alternative is to expand hours, but this is not a smart option when the facility is underutilized. The only way that it makes sense is if market research reveals that significant patient populations can only schedule exams after 7 PM on weekdays, after 5 PM on Saturdays, or perhaps on Sundays. This strategy will materially increase fixed expenses. The situation is serious enough that incremental business at the maximum market fee ($675) requires 113 scans per month just to break even.
Scenarios 2 through 4 show more favorable incomes per scan, but volumes are below the breakeven point. Column G shows the incremental monthly exams needed to break even at the current fees, and column I shows the maximum monthly profit at these fees.
Scenario 5 is already above the breakeven point, at 190 scans per month, due to a favorable payor population. Its maximum monthly income at this fee is $94,000.
Payor Fee Schedules and Capitation
Payors seek contracts with imaging centers that meet licensure requirements and are willing to accept their fees as payment in full. Major payors will generally provide their technical-component fees either by listing them according to CPT® code or supplying a conversion factor that can be applied to technical-component RVUs. Those planning before opening a facility should be familiar with the proportion of scans, by CPT code, performed in an outpatient environment.
These proportions supply the weighting factors that, when extended with payor fees, provide the average fee per scan for a payor. A facility that has been in operation for a period of time automatically knows its exam mix by CPT code. Payor-based research leads to step two: making a determination of the approximate percentage of the caseload covered by each payor. The most useful way to obtain this information in advance is by seeking data on the payor mixes of the referring physicians in the area where the facility would be based.
A dominant payor can use its influence to direct patients to an imaging center by informing the referring physicians that the center is a participating provider. If the fee schedule does not offer enough benefit, however, as determined by breakeven modeling, the facility can choose not to sign an agreement. This does not preclude a patient’s use of the facility, but the patient might be responsible for either the entire fee or the difference between the facility and payor fees (a potential bad-debt issue). Payors will warn patients about the financial implications of using a nonparticipating provider. Given the cost of a scan, it is not likely that a patient will ignore the warning.
Capitation is a mechanism through which a payor seeks to shift utilization risk to the provider, based on the theory that the provider and payor will team up to control utilization. The facility will still be required to submit claims to the payor, but the payment scheme differs. A facility with good breakeven information can readily determine the advantages or disadvantages of a proposal, or how it is operating under an existing agreement. There are a number of advantages of capitation relationships that are not evident in fee-for-service arrangements, and a facility with good cost information can thrive in this environment because the facility receives its income in advance of providing services. It also knows what it will receive each month, and the payor is more an ally than an adversary. The payor will try to work closely with the facility to make the agreement function well because it should want to keep its providers financially stable.
The important advice to a facility that is approached by a managed care plan is that it should never do business with one that is unwilling or unable to supply utilization information relevant to the services being provided. Table 4 explains the core information for an agreement.
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The payor states that it has 25,000 lives under its managed care plan within 30 minutes of the facility. It wishes to have all of its outpatient MRI scans performed there and finds the center’s hours to be acceptable, so any member can schedule an exam within 15 days of a physician’s order. The payor provides CPT-code details showing that its MRI utilization averages 51 scans per 1,000 lives per year, and it offers to pay $1.60 per member per month.
The offer translates to $40,000 per month. If referral patterns stay consistent with past utilization, the facility will perform 106.25 scans (line F), meaning that it will average $376 per scan (line G). The provider gains a financial advantage if average volumes drop below 51 per 1,000 lives, but a disadvantage if volume increases. The breakeven information will help the center evaluate the implications of either agreeing to the terms or making a counterproposal. Table 5 shows one set of assumptions.
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The facility has been running at low volumes, with a relatively favorable income per scan. This has been producing a monthly loss of $67,429. Scenario 1 depicts the addition of the patients attributed to the capitation agreement at the predicted utilization rate. The contract does not bring the center up to the monthly breakeven point; it still is running at a monthly loss of $31,881. The fee per scan required to fill the remaining slots can be reached more easily (142 scans at $266.51 per scan), however. Column H lists the volume required to break even if incremental volume is reimbursed at the historic level. This is well below the facility limit.
Scenario 2 shows utilization at less than historic levels. Even though the income is the same ($40,000), the contribution margin is slightly better because of lower variable expenses. If incremental cases are at fee-for-service levels, the breakeven would not be much different:
31,419/(525–42)=65
Scenario 3 has utilization above historic levels. Thus, there is a lower contribution margin due to higher variable expenses; the breakeven point at full capacity can be reached at 128 scans at $295.66 per scan. The breakeven point at $525 per scan would be:
32,469/(525–42)=67
It is important to note that utilization patterns can vary above or below the managed care historic levels within a reasonable range without seriously affecting the incremental amounts need to break even. Table 6 shows another circumstance.
Click here to view Table 6
This set of scenarios depicts a facility with much higher existing volumes and a much lower income per scan. The capitation proposal will prompt additional number crunching by the facility because it will have to expand hours to handle the workload. This will require adding both administrative and technologist staff. The column-G fixed expenses would change. In this case, the facility may wish to counter the offer of $1.60 per member per month so that the income per scan, at known utilization rates, is closer to the fee-for-service average.
Conclusion
There was little motivation to use advanced cost-accounting techniques when payor reimbursements greatly exceeded costs (as they did in the 1980s and 1990s). This favorable environment encouraged the proliferation of imaging centers and, of greater concern to payors, the placement of expensive imaging technology in referring physicians’ offices. It has been speculated that imaging costs have been one of the fastest-growing segments in health care, triggering aggressive payor responses intended to force consolidation of this market.
Only centers with high volumes and well-controlled costs can survive. Imaging centers that can aggressively price their services to payors will convert these insurers into allies that will promote their facilities to referring physicians. Breakeven modeling is an important tool for testing pricing models (fee for service or capitation) to determine how to remain profitable in this tightening environment.